The Anglo-American oil market is broken

May 15, 2016 12:00 AM

By F. William Engdahl

For most of the post-1945 period the world economy has been under the control of the large Anglo-American oil majors, their banks and their friends in OPEC, most especially Saudi Arabia. Today that control in the world oil market is irreparably broken. The world is entering a new phase in the Petroleum Era, a potentially far more interesting one.

In September 2014 when Brent oil prices were bouncing around the $100 a barrel range, Washington had the delusion that it could re-enact what it did with Saudi Arabia back in 1986 and collapse the world oil price in order to bring Russia to her economic knees. By December 2014 it was becoming clear that it was Washington and the US shale oil industry that was being brought to her knees, not Russia. That was the first major indication something was terribly wrong with the control mechanisms over world oil that Wall Street and the major Anglo-American oil companies had enjoyed for so many decades.

Now, more than twenty months later, as the signs that the shale oil bonanza is collapsing in a wave of bankruptcies across America, Prince Mohammed bin Salman, son of King Salman, has fired the architect of that strategy, Saudi Oil Minister Ali al-Naimi, once the most powerful voice in OPEC. Al-Naimi was the architect of the 2014 Saudi policy which never aimed that much at Russia, a conventional oil country, but rather at the high-cost shale oil competitors in the USA that were taking control of world oil markets away from Saudi Arabia and OPEC.

In April in Doha, Qatar, OPEC countries, minus Iran’s Oil Minister, plus Russia, met to discuss placing a ceiling on their oil output. Oil market traders were cautiously optimistic. In the end, the meeting ended in failure. The reason reportedly was that Prince bin Salman went against the wishes of his own oil minister, al-Naimi and refused a deal that excluded Iran, Salman’s bete noir. Salman is a bitter foe of Shi’ite Iran and Iran’s emerging role as an economic factor once more within the world of oil and gas after the lifting of sanctions last year.

On May 7, 80-year-old Saudi Oil Minister al-Naimi was suddenly fired after 20 years and replaced by Khalid Al-Falih, chairman of Saudi Arabian Oil Co., the state-owned producer, as Saudi Minister of Energy, Industry and Mineral Resources. Khalid’s main virtue seems to be that he follows orders from the 31-year-old Prince Salman, a person who recently proposed to privatize the world’s largest oil company, ARAMCO and to invest $2 trillion into moving the Saudi economy away from its overwhelming oil dependency.

The oil markets might have been expected to rejoice over the prospect that maybe now the low-price strategy of al-Naimi had ended, and the new minister would move to boost oil prices and end the shale wars. Instead, Khalid announced there would be no policy change. Oil prices hover around $45 a barrel, almost unchanged, while traders try to assess the most confusing oil markets in decades.

At this point, for Saudi Arabia to continue control oil prices globally and keep market share is tantamount to pushing on a string. It ain’t working and can’t. The world is literally swimming in oil and more is being discovered daily.

End of OPEC?

As Russian oilman and close Putin adviser, Igor Sechin, CEO of the world’s largest oil company, state-owned Rosneft, declared in a May 10 Reuters interview, “At the moment a number of objective factors exclude the possibility for any cartels to dictate their will to the market. … As for OPEC, it has practically stopped existing as a united organization.”

To add to the depressing factors that are breaking OPEC power today, the al-Naimi policy of eliminating shale oil has not only caused major losses for Saudi Arabia’s state budget, now in deficit. It has also created a surplus glut of an estimated 3 billion barrels, or 3,000 million barrels of oil floating in storage somewhere on the high seas or any nook and cranny it can be dumped until prices improve. If OPEC could manage to cut production by 3 million barrels a day, it would take almost three years to draw down that glut on the market. And no one is talking of cutting 3 million barrels or even 1 million. Only of freezing at current high levels so that the glut, like the water flood of the Sorcerer’s Apprentice, will keep growing.

The broken world oil market today will have enormous, yet little-appreciated political consequences for our world.

For starters it will severely weaken the ability of the Saudi Kingdom to continue financing ISIS terrorism in Syria and around the world.

It will also weaken the grip of the US dollar on world trade as oil is far the largest traded commodity in the world with the possible exception of illegal narcotics.

And the collapse of the high-cost US shale oil industry is also a foregone conclusion. The firing of al-Naimi is a kind of marker event to the end of Anglo-American control of world oil markets.

Another marker is the fact that Russia’s own ruble-based oil trading market, the St. Petersburg International Mercantile Exchange, or SPIMEX, is about to open for business trading Russian oil not for US dollars but for rubles. The chairman of SPIMEX is none other than Igor Sechin. Interesting world.

F. William Engdahl is strategic risk consultant and lecturer, he holds a degree in politics from Princeton University and is a best-selling author on oil and geopolitics

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